Kellman v. P.S.E. & G. (In Re Jolly "N", Inc.)Kellman v. P.S.E. & G. (In Re Jolly "N", Inc.)
OPINION
The matter before the Court is the Chapter 7 Trustee’s “Complaint To Recover Preferential Transfer.” At issue in this adversarial proceeding is the avoidability of certain payments made by the debtor, Jolly “N” Inc. (“Jolly N”), to the defendant, Public Service Gas & Electric Company (“PSE & G”). Specifically, the Trustee seeks to avoid these payments as preferential transfers under
The following constitutes this Court’s findings of fact and conclusions of law.
The debtor filed a voluntary Chapter 11 petition on May 22, 1985 pursuant to the Bankruptcy Rеform Act of 1978, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984. The matter was subsequently converted to a liquidation proceeding under Chapter 7 of the Bankruptcy Code, and Harry B. Kellman was appointed Trustee of the estate of Jolly “N”.
Dennis Block, supervisor of collections of PSE & G testified that between February 21, 1985 and May 22, 1985, the debtor was indebted to PSE & G for gas, electric and streetlight services supplied to the debtor’s business рremises in Pennsauken, New Jersey in the, approximate amount of $45,-000.00. Prior to the filing of the Chapter 11 petition, the debtor was in the business of operating a restaurant and bar in Penn-sauken, New Jersey. (Transcript of December 21, 1989 at pp. 5-6) (hereinafter “Tr. at _”). In describing those payments Block stated:
They were payments on the services used during that period mostly or you could use it either way, but we knew that the Jolly N was on a — with their other creditors on a cash only basis, no services were supplied unless the cash was paid up front.
So we knew that they couldn’t get serviсe anywhere else. They had to use our service. We didn’t want to shut them off and put a lot of people out of work, so we tried to work along with them on payments.
(Tr. at 6).
Block testified in regard to payments received from the debtor during this period that PSE & G would pay the current bill first, and apply any surplus to the balance due. (Tr. at 9-10). Block further testified that current billings included the billing for the current month plus any unpaid balances due on the account. (Tr. at 18).
Block testified that on the date of the filing of the petition on May 22, 1985, Jolly “N” was indebted to PSE & G on Account No. 61-565-950-23 in the amount of $39,-779.08. (Tr. at 11, P-17). Block also testified that the amount due by the debtor to PSE & G as of July 8, 1985 was $43,756.96. (Tr. at 11, P-18). PSE & G filed a proof of claim in this proceeding in the amount of $43,756.96. (Tr. at 12). (P-37).
As of February 19, 1985, Jolly “N” was indebted to PSE & G in the amount of $60,007.69 for utility services and late payment charges incurred by the debtor on two separate accounts maintained with PSE & G. (J-l). The parties’ transactions during the 90 day preference period were as follows:
Late Pmt. Monthly Previous Charges = Total Payment Balance Total
317.71 12,687.12 47,320.57 60,007.69 2/19/85 11,588.06
744.25SL 1 7.10
15,000.00 45,007.69 3/1/85
774.25 44,233.44 3/12/85
3/20/85 9,501.91 to Oí crt
774.25SL Í — 1 —3 10,562.98 44,233.44 54.796.42
20,100.00 34.696.42 3/26/85
4/19/85 9,903.78 tr-j lO O
10,897.47 34,696.42 45.593.89 774.25SL t-CQ ^ yH
5,000.00 40.593.89 5/6/85
5,000.00 35.593.89 5/13/85
5,000.00 30.593.89 5/20/85
12,392.86 30,593.89 42,986.75 5/20/85 11,393.98 744.25SL Oí ^ rH ^ CO rA O <M (M
5/22/85 720.60
772.21 42,986.75 43,758.96 51.61SL
(J-l).
Check No. Date Issued Date Received Amount
1785 2/20/85
1365 4/30/85
1368 5/10/85
1382 5/17/85
(P-41, P-42, P-43, P-44).
3/1/85 $15,000.00
5/6/85 5,000.00
5/13/85 5,000.00
5/20/85 5,000.00
Check No. 1785 was drawn on debtor’s “tax account” at First Peoples Bank оf New Jersey, and the other three checks were each drawn on the debtor's “trust account” at the same bank.
On or about July 8, 1985, PSE & G filed a proof of claim in this court for $43,756.96 which represented unpaid bills for utility services supplied to Jolly “N” for the time period from January 18, 1985 through May 22, 1985. PSE & G also filed an administrative proof of claim for $958.12 which represented the amount owed for utility services received post-petition.
The determination as to whether a transfer is an avoidable preference is a two-step process. First, the Trustee has the burden of establishing the five elements making up a prima facie case of a preference.
The defendant PSE & G denied that the four transfers at issue are preferences. Further, PSE & G asserts that if the transfers are deemed preferential transfers, the transfers fall into one or more of the “statutory safe harbors” of
A. Elements of a Preference Under
The Bankruptcy Code provides at
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between 90 days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such, creditor would receive if—
(A) the case were a case under Chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the pi'ovision of this title.
The court is satisfied that the Trustee established, by a preponderance of the evidence, each of the statutory elements of a preference for the four transfers at issue. There is no question that the payments were made by Jolly “N” and were transfers of an interest of the debtor in property to or for the benefit of PSE & G. The record establishes that the utility bills received by Jolly “N” were for services which had been previously consumed, and did not include any charges for future services, thus satisfying the requirement that the debt be antecedent. For utility services, courts have held that the debt is incurred at the time the resource is consumed.
In re Emerald Oil Co.,
Although the defendant has not raised the issue, the court will briefly address, in the interest of completeness, the question of whether the debtor’s $15,000.00 payment by check dated February 20, 1985 should be deemed to fall within the preference period. Here the check was issued by the debtor on February 20, 1985 and honored by the drawee bank on February 22, 1985. The parties stipulated that the preference period commenced on February 21, 1985. Courts confronted with the question are by no means in agreement as to whether a check is “transferred” for purposes of
The final element that the Trustee had the burden of establishing is that PSE & G, on account of the four subject transfers, received more than it would have were the case one under Chapter 7 of the Bankruptcy Code. The only evidence presented at trial concerning this element is the following testimony by the Trustee:
BY MS. CAROL A. SLOCUM (Attorney for the Trustee):
Q: Rabbi Kellman, based on your review of the claims register, could you indicate to the court the approximate amount of the unsecured claims in this bankruptcy proceeding?
A: About $2 million.
Q: Rabbi Kellman, could you indicate to the court the amount of funds you have available in the estate for distribution to creditors?
* * * * * *
A: Approximately $90,000.00.
jfc jfc s}: s}: sfc :j<
Q: Rabbi Kellman, could you indicate to the court, do you have аn estimate of what unsecured creditors will receive?
A: Just a partial amount; very, very small amount.
Q: Do you anticipate the distribution to be—
A: I don’t anticipate too much more revenue into the estate, and the estate owes about $2 million.
(Tr. at 27-30).
The standard for determining whether a creditor received more, as a result of alleged preferential transfers, than it would have received under a Chapter 7 distribution is whether the general unsecured creditors would receive less than 100% recovery on their claims.
In re Meinhardt Mechanical Service, Inc.,
Being satisfied that the Trustee has established that the four subject transfers were, indeed, preferences, the court now must ascertain the applicability and extent of PSE & G’s affirmative defenses to the avoidance of the transfers.
B. The Contemporaneous Exchange for New Value Defense Under § 5^7(c)(l).
PSE & G’s first affirmative defense is that the subject transfers constituted contemporaneous exchanges for new value and were therefore excepted from avoidance by
(c) The trustee may not avoid under this sectiоn a transfer—
(1) to the extent that such transfer was—
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange.
The defendant argues that due to the “unique” nature of the utility industry, in which utility services are supplied to a customer and then billed at the end of the billing cycle after the meters are read, a customer’s payment of a bill for service supplied in a previous billing cycle is contemporaneous for purposes of
Neither the Bankruptcy Code or the case law interpreting the relevant Code sections supports PSE & G’s position. To fall within the contemporaneous exchange exception, both parties must intend, at the
For the same reasons that this Court found that the transfers were on аccount of an antecedent debt for purposes of
The Court is also unconvinced that the continued provision of utility services constitutes “new value” for purposes of
[replenishment of a line of credit on an open accоunt in response to a receipt of payment is not a contemporaneous exchange for new value because the payment was intended to satisfy a previous debt and substitution of credit in response to a payment is an existing obligation.37 B.R. at 327 . (citation omitted).
Id.
For these reasons, PSE & G’s contemporaneous exchange defense must fail.
C. The Ordinary Course of Business Defense Under
The second defense raised by PSE & G is that the transfers at issue are excepted from avoidance by the Trustee as being made in the ordinary course of business under
(c) The trustee may not avoid under this section a transfer—
(2) to the extent that such transfer was—
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms.
The legislative history of
Because of the conjuctive nature of the statute the defendant must prove each of the three elements of
The terms “ordinary course of business” and “ordinary business terms” are not defined by the Bankruptcy Code. In order to make a determination whether the transfers were made “in the ordinary course of business” between Jolly “N” and PSE & G, the court must view the transactions from a subjective perspective, taking into account such factors as: (1) the length of time the parties have engaged in the type of dealing at issue; (2) whether the subject transfer was in an amount more than usually paid; (3) whether the payments were tendered in a manner different from previous payments; (4) whether there appears any unusual action by either the debtor or creditor to collect or pay on the debt; and (5) whether the creditor did anything to gain an advantage in light of the debtor’s deteriorating financial condition.
In re Richardson,
For purposes of
Here, PSE & G failed to meet these burdens. The paucity of evidence presented by PSE & G on this defense failed to establish the ordinariness of the transactions as between PSE & G and Jolly “N” and their ordinariness in the context of utility industry practice. Counsel for PSE & G in his brief to the Court and at trial argued that the debtor’s payments to PSE & G during the 90 day preference period followed the same pattern as made during the several months preceeding the filing of the bankruptcy petition. (Tr. at 56-57). PSE & G relies upon the following billings and payments on and after November 28, 1984 as follows:
Late Pmt. Date Billing + Charges Monthly Previous Total Payment Balance Total
11/28/84 10,000.00 63,882.11
12/7/84 10,000.00 53,882.11
12/18/84 11,449.22 394.34 12,617.81 53,882.11 66,499.92
774.25SL
12/21/84 10,000.00 56,499.92
12/28/84 10,000.00 46,499.92
1/18/85 10,512.65 300.96 11,594.90 46,499.92 59,094.82
774.25SL 7.04
1/23/84 10,000.00 48,094.82
2/13/85 774.25 47,320.57
Finally, even if PSE & G had established that lump sum payments were the “usual” method of payment between the parties, which it did not, the payments at issue were substantially different from the previous lump sum payments made. Whereas Jolly “N” had made $10,000.00 lump sum payments prior to the onset of the preference period, the transfers subject to avoidance were for one $15,000.00 and three $5,000.00 payments. The defendant also did not, produce any evidence that lump sum payments are a usual practice in the utility industry.
For the reasons given above, the Court finds that the defendant has failed to meet its burden of establishing that the alleged preferential payments were made in the “ordinary course of business” between the parties, and that the payments were made according to “ordinary business terms”. Although the Court is mindful of the fact that in certain situations the parties may adopt a practice of payment which becomes the ordinary course of business between them, there was no evidence of a lengthy or established course of conduct between Jolly “N” and PSE & G presented thаt would render the contested lump sum transfers “ordinary.”
See J.P. Fyfe, supra,
D. The Subsequent Advance Defense Under § 5b7(c)(4).
PSE & G also argues that it is entitled to setoff against the alleged preferential transfers an amount equivalent to the value of utility services provided to Jolly “N” between the date the payments were made and the date that Jolly “N” ’s bankruptcy petition was filed. PSE & G also contends that it may offset the unpaid charges incurred by Jolly “N” post-petition. The Court will consider the claim for setoff as made pursuant to
Subsection 547(c)(4) states:
(c) The trustee may not avoid under this section a transfer—
(4) to or for the benefit of a creditor, to the еxtent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.
Again, the burden is on the transferee to establish the applicability of the exception to the avoidance.
In the case
sub judice,
defendant PSE & G urges the Court to apply the so-called “net result rule” in which all advances and transfers within the preference period are netted against each other to determine the amount to be allowed as an offset.
The court in
In re Rustia,
Thus, only preferential transfers made by the debtor before the new value was given may be netted out against the subsequent new value. However, preferential payments following receipt of new value are not netted against the new value. Thus, the net result rule does not apply to the 90 day preference period as a whole; each transfer must be examined independently to determine whether or not the creditor later replenished the estate.
In re Rustia,
At least one court has expressly rejected an interpretation of
At the outset of any
Turning to the facts at hand, the Court finds that PSE & G is entitled to a set-off of new value in the amount of $15,772.21. This amount is calculated as follоws:
1. For the period from February 21, 1985 (the commencement of the preference period) through March 1, 1985 (the date that Jolly “N” 's first preferential payment was received), PSE & G is not entitled to any setoff for utility services rendered because such services were rendered prior to any preferential payments and thus cannot be considered “subsequent advances.”
2. For the period from March 2, 1985 to March 20,1985, PSE & G is entitled to no setoff because it failed to introduce any evidence of the amount of the $10,-562.98 utility bill of March 20, 1985 that is attributable to the period dating from the receipt of Jolly “N” ’s $15,000.00 paymеnt of March 1, 1985. Since no proof has been offered as to the actual value of services supplied to the debtor after the preferential transfer, but before the next billing period, the Court must conclude that PSE & G has not sustained its burden of proof.
See Matter of Georgia Steel, supra,
3. PSE & G is entitled to set-off the entire amount of the April 19, 1985 bill of $Í0,897.47 for the period March 20, 1985 through April 19, 1985 against the debtor’s payment of $15,000.00 on March 1, 1985 because the amount was advanced after the receipt of Jolly “N” ’s preferential payment of March 1, 1985, was unsecured and remained unpaid as of the date of the bankruptcy petition. The pаyment of $15,000.00 by the debtor on March 1, 1985 may also be netted against the subsequent bill of May 20, 1989 in the amount of $12,392.86. This amount was advanced after the receipt of the debtor’s preferential payment of $15,000.00 on March 1, 1985, was unsecured and remained unpaid as of the date of the filing of the bankruptcy petition. As a result, the March 1, 1985 $15,000.00 payment will be entirely insulated from attack as a preferential payment. With regard to the payments of $5,000.00 each made on May 6, 1985 and May 13, 1985 and May 20, 1985, while PSE & G billed the debtor on May 20, 1985 in the amount of $12,392.86 for the period from April 19, 1985 to May 20, 1985, PSE & G is entitled to no set off of this amount because it failed to introduce any evidence of the portion of the May 20, 1985 bill in the amount of $12,392.86 that was supplied after these preferential payments.
4. For the period from May 20, 1985 to May 22, 1985, PSE & G is entitled to setoff the entire value of utility services provided for that period of $772.21 because service was provided after receipt of the preferential payments of May 6, 1985, May 13, 1985 and May 20, 1985, of $5,000.00 each, was unsecured, and remained unpaid on the date Jolly “N” filed its bankruptcy petition.
PSE & G’s entire offset amounts to $15,-772.21. The Trustee is therefore entitled to recover from PSE & G for thе benefit of the estate of Jolly “N” the sum of $14,-227.79 as an avoidable preference under
As for PSE & G’s claim that it is entitled to an offset in the amount of the value of services provided post-petition, that claim is hereby rejected. Post-petition advances of new value may not be applied to offset preferential transfers.
In re Ford, supra,
Accordingly, the Trustee is entitled to recover from PSE & G for the benefit of the debtor estate the sum of $14,227.79 as an avoidable preference under
The Court hereby further orders that PSE & G remit, pursuant to
Notes
. These figures refer to the account for street-lighting provided to the debtor. (Tr. at 45).
. Several courts have held that the date of delivery of the check by the debtor controls on the question of whether a transfer is made within or without the 90 day preference periоd.
In re Wolf & Vine,
. For a similar application of
. The conclusion that a transfer occurs on the date of receipt by the transferee for (c)(4) purposes is not inconsistent with the conclusion that a transfer occurs on the date that a check is honored by the drawee's bank for